The Quality of Fiscal Adjustment and the Long-Run Growth Impact of Fiscal Policy in Brazil

The authors describe the main trends of Brazil's fiscal policy during the past decade and analyze (1) the ability to raise the primary surplus in response to external shocks, (2) the pro-cyclical nature of fiscal policy, and (3) the long-run impact of government expenditure composition and taxation. They analyze the use of the primary balance as a policy tool within the Drudi-Prati model, wherein the government uses the primary balance to reveal its commitment to service its debt. The authors verify that both the debt ratio and the primary balance are determinants of spreads and credit ratings in Brazil. But the relationship is nonlinear: the impact of the primary balance on spreads is amplified as the debt ratio increases. Using an Autoregressive Distributed Lag (ARDL) approach, the authors analyze the relationship between the primary balance and economic activity, finding a positive correlation in the long run. However, in the short run fiscal expansions are associated with primary balance reductions and vice-versa during output contractions, confirming the procyclical nature of fiscal policy in the short run. The authors use two approaches, ARDL and a cointegrating value at risk (VAR), to analyze the interaction between public expenditure composition and taxation on growth. Similar results are obtained: large elasticities of output with respect to capital stocks, a significant negative impact of taxation on long-run GDP, and a negative impact of increasing government consumption and transfer payments on GDP. These results shed light on the contribution of fiscal policy to disappointing growth performance in Brazil during the past decade.

Bibliographic Details

Main Authors:	Blanco, Fernando, Herrera, Santiago
Language:	English en_US
Published:	World Bank, Washington, DC 2006-09
Subjects:	AIC, ASSET PRICES, AUTOMATIC STABILIZERS, BALANCE SHEETS, BORROWING, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUDGET PROCESS, BUSINESS CYCLE, CAPITA TERMS, CAPITAL EXPENDITURES, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITAL MARKETS, CAPITAL SPENDING, CAPITAL STOCK, CASH FLOW, CENTRAL BANK, CREDIT RATINGS, CURRENT EXPENDITURES, CYCLICAL FISCAL POLICY, DEBT CRISIS, DEBT DYNAMICS, DEBT RATIO, DEBT RATIOS, DEBT SERVICE, DEBT SUSTAINABILITY, DEPOSITS, DOMESTIC DEBT, DOMESTIC INTEREST RATES, ECONOMIC POLICY, ECONOMIC REFORM, ECONOMIC REFORMS, ECONOMIC SLOWDOWN, ELASTICITIES, ELASTICITY, ERROR-CORRECTION TERM, EXCHANGE RATE, EXPENDITURES, EXTERNAL FINANCING, EXTERNAL SHOCKS, FINANCIAL CRISES, FINANCIAL TRANSACTIONS, FISCAL ACCOUNTS, FISCAL ADJUSTMENT, FISCAL ADJUSTMENT EFFORT, FISCAL BALANCE, FISCAL BALANCES, FISCAL CONDITIONS, FISCAL DISCIPLINE, FISCAL DISEQUILIBRIA, FISCAL EXPANSION, FISCAL EXPANSIONS, FISCAL IMBALANCE, FISCAL IMPACT, FISCAL OUTCOMES, FISCAL POLICY, FISCAL REFORM, FISCAL RESULTS, FISCAL STABILITY, FISCAL STANCE, FISCAL SUSTAINABILITY, FISCAL SYSTEM, FISCAL VARIABLES, FORECASTS, FUTURE VALUE, GDP, GDP PER CAPITA, GOVERNMENT ACCOUNTS, GOVERNMENT BONDS, GOVERNMENT CONSUMPTION, GOVERNMENT EXPENDITURE, GOVERNMENT EXPENDITURE COMPOSITION, GOVERNMENT SPENDING, GOVERNMENT SUBSIDIES, GROWTH RATE, HEALTH SERVICES, HIGHER INTEREST, HIGHER INTEREST PAYMENTS, INDEXATION, INFLATION, INFLATION RATE, INSURANCE, INTEREST PAYMENTS, INTEREST RATE, INTERGOVERNMENTAL TRANSFERS, INTERNATIONAL RESERVES, LEGAL FRAMEWORK, LIQUIDITY, LOCAL GOVERNMENTS, MANDATORY SPENDING, MONETARY AUTHORITIES, MONETARY EXPANSION, MONETARY IMPACT, MONETARY POLICY, MONEY CREATION, MUNICIPALITIES, MUTUAL FUND, NATIONAL ACCOUNTS, NATIONAL INCOME, NEGATIVE REAL INTEREST RATES, NET WORTH, NOMINAL EXCHANGE RATE, OPEN MARKET OPERATIONS, OPERATIONAL BALANCE, PERSONNEL EXPENDITURES, PRESENT VALUE, PRESENT VALUE OF DEBT, PRICE CONTROLS, PRIMARY BALANCE, PRIMARY EXPENDITURE, PRIMARY SURPLUS, PRIVATE SECTOR, PROBABILITY OF DEFAULT, PRODUCTION FUNCTION, PUBLIC CAPITAL, PUBLIC CONSUMPTION, PUBLIC DEBT, PUBLIC EMPLOYEES, PUBLIC ENTERPRISES, PUBLIC EXPENDITURE, PUBLIC EXPENDITURE COMPOSITION, PUBLIC FINANCE, PUBLIC FINANCES, PUBLIC INVESTMENT, PUBLIC SECTOR, PUBLIC SECTOR DEFICITS, PUBLIC SECTOR EMPLOYEES, PUBLIC SPENDING, REAL INTEREST RATE, REAL INTEREST RATES, REAL TERMS, REVENUE INCREASES, REVENUE RATIO, RISK AVERSION, RISK PREMIUM, SAVINGS, SIGNALING, SOCIAL ASSISTANCE, SOCIAL CONTRIBUTIONS, SOCIAL SECURITY, SOCIAL SECURITY SYSTEM, SOCIAL SERVICES, SOFT BUDGET CONSTRAINTS, SOVEREIGN RISK, STATE GOVERNMENTS, TAX, TAX BURDEN, TAX RATIO, TAX REFORM, TAX REVENUE, TAX REVENUES, TAXATION, TIGHT MONETARY POLICY, TOTAL EXPENDITURE, TOTAL REVENUE, TRANSFER PAYMENTS, TRANSPARENCY, UNCERTAINTY, UNEMPLOYMENT,
Online Access:	http://documents.worldbank.org/curated/en/2006/09/7036384/quality-fiscal-adjustment-long-run-growth-impact-fiscal-policy-brazil https://hdl.handle.net/10986/9299
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